Student Loans

Should you Pay off Your Student Loan Early?

If you have a student loan then you could think that it would be a great idea to pay it back early. You may decide that you want to get rid of that debt, stop having to make those payments each month and be free of it all. You might think that it will be cheaper to pay it back early as it will be cheaper and so you will save money in the long run. However, a student loan has some differences to other loans and therefore the decisions made about paying them back early are different.

Often when we borrow money we are advised that we should pay it back as soon as possible. This is because it is expensive to borrow money and if we pay it back early, the interest payments are less in quantity and therefore we save that money. With a student loan things are slightly different.

A student loan does not have to be paid back if you are earning under a certain amount of money. Then there is repayment scale, so the more you earn, the more you repay until you hit a threshold. If you have not repaid the entire loan before 30 years are up, the rest gets written off. This is the current ruling, but as the rules are set by the government, they could change, particularly if the government changes hands. It is therefore really important to make sure that you have a clear understanding of the rules of the loan before you think about paying it off early.

If the above is correct, then financially it is likely you will better off not paying it back early. If you are not likely to pay it all back, if you do not have a job that pays that much, then if you it back early you could end up paying more than you would if you just continued with the instalments. If you are likely to be out of work for a while, perhaps to have a child, look after unwell relatives, take a long trip abroad or have difficulty finding a job, then this will all be time when you will not have to make the repayments. It is hard to predict whether this is something you might be doing in the next thirty years but you could do some rough calculations of how much you would need to earning and how many days you would have to be in work to see what the chances were of you paying back more if you pay it off in a lump sum compared to just paying the regular payments.

Of course, the cost may not be the only factor for you. You might not like the idea of being in debt and having a loan. This is understandable but it is worth noting that it is not treated in the same way as a loan. As the repayments come out through your tax code, you will not have anything on your credit report to show that you are making repayments on a loan so it should not have an effect on your ability to borrow money. The repayments are relatively small and calculated so that they are affordable which means that they should not place a big financial burden on you. Some debt is considered to be good because it works as a way that you can invest in your future. This is what many consider a student loan to be – an investment in your future. If you can think this way, it could prevent you from feeling so anxious about the loan.

So it is usually felt not to be good to pay a student loan back early. However it is always worth calculating this for yourself to see if you agree. It can be hard to predict what you may be doing in the future, but it is worth considering a few scenarios and looking at the figures to help you to decide. If you find that tricky then talk it through with someone or look online for figures that other people have done to help you. The longer you spend researching, the better decision you can make. Even if you make the wrong one, at least you will know that you spent lots of time and effort deciding.

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